Let's roll back damaging bankruptcy "reforms" and give Americans the same treatment banks have experienced.

Due to legal decisions about how to structure the rules governing student debt, student loans stay forever, are virtually impossible to discharge under hardship, churn fees when they go bad, and creditors can access anything, including Social Security, in their attempts to be repaid. This is significantly more strict than the rules for other kinds of debt. Here's a great way to describe the legal frame we use to treat student loans, from Elizabeth Warren in 2007: "Why should students who are trying to finance an education be treated more harshly than someone who negligently ran over a child or someone who racked up tens of thousands of dollars gambling?"

So what's the solution? There's a short-term and a long-term problem. The long-term problem, in my mind, can only be solved by unapologetically embracing the promise of a "public option": free public universities that are capable of constraining cost inflation. This requires us to also face and resist the corporatization and privatization of our existing public universities.

But that doesn't get us out of the current situation. What can be done? I propose two things:

1. Party Like It's 1989

Instead of being so bold as to ask that people trying to invest in themselves, and ultimately the country, are treated as fairly as someone who negligently ran over a child, I'm just going to suggest we just do a mulligan on the 1990s and 2000s student loan "reforms."

Here's a quick, high-level history of student loans and the bankruptcy code, courtesy of University of Illinois law professor Bob Lawless:

In 1976, Congress first added an exception to the bankruptcy discharge dealing with student loan debt. That exception was continued in the 1978 Bankruptcy Code, and the exception was expressly limited to student loans from a governmental unit or nonprofit institution. Even then a student loan could be discharged if more than five years had passed since the loan first became due (typically after graduation) or if the debtor could show payment of the student loan would cause undue hardship, which is a difficult burden to show.  In 1990, five years was changed to seven years and in 1998 was dropped altogether, leaving undue hardship the only reason a court could discharge a student loan from a governmental unit or nonprofit institution. As part of the 2005 changes to the U.S. bankruptcy law, Congress again amended the student loan discharge exception to allow even loans from for-profit lenders to be excepted from the bankruptcy discharge.

Let's put that in a chart, adding the other issues of Social Security and no statute of limitations I talked about here:

Why not just undo the rules from the 1990s and 2000s? It is hard to see these as anything other than a giant subsidy to private agents. If you look at Sallie Mae's leaked lobbying documentation, you'll find that "[t]he number two item... wasn't increasing federal student loan limits or beating back the loan consolidation companies... It was bankruptcy; specifically, preserving the special status that private student loans gained in the broad changes to bankruptcy laws that Congress enacted in 2005. To Sallie Mae, that provision is the key to its version of 'private credit economics.'" There's little evidence these reforms increased access for anyone and functioned more as an easily captured subsidy.

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We can keep nondischargeability for five years if people are concerned about moral hazard. That concern emanates from the 1970s and stories of doctors declaring bankruptcy the day after they graduated medical school. This will at least stabilize and formalize the system of indenture that is required for people to fully develop their talents and abilities in our country, instead of our system that currently keeps people for life. Let's regraph what it looks like when we go back to 1989:

That looks way better. But how do we deal with the current affordability crisis? Getting unemployment down and incomes up are an obvious solution. Sarah Jaffe suggests mass debt forgiveness, Justin Wolfers disagrees. I have a suggestion that splits the difference.

2. Convert the American People into a Bank

A miraculous thing happened in late September 2008. Goldman Sachs and Morgan Stanley were reborn from investment banks into bank holding companies by a decree of the Federal Reserve. Normally getting a license like this takes a year and a half and requires following extensive regulatory rules. The Federal Reserve did it over a weekend for Goldman, Morgan Stanley, and a host of other financial firms.

This allowed them many banking privileges that helped during the crisis, including access to the discount window, but none of the scrutiny that normally comes with them. As Alan Grayson and others noted, Goldman's CFO bragged that "our model never really changed." They got to escape normal banking regulatory rules during the subsequent time period. These "deathbed conversions" from investment bank to bank holding company were yet another part of the extensive way the bailouts worked beyond TARP, and they were proof that the firms were Too Big To Fail.

Since regular Americans are also in crisis mode and Too Big To Fail, why not symbolically declare regular Americans a bank too? Why not also do a "deathbed conversion" on those who are suffering under the burden of heavy student debts and low incomes and let them immediately refinance all their student loan rates at the current ultra-low discount window rate? Why not mass refinance them into the current low rates the financial sector enjoys? This would give the 99% just a hint of the kind of total government support places like Goldman Sachs have experienced.

We've thrown open the floodgates for the financial sector. Why not for regular Americans? There have been past congressional efforts to lower the interest rate, ones that passed the House, so this is feasible. And it would be the logical conclusion of the crisis we've just lived through, delivering stimulus to the economy and reducing the burden of debts on those trying to rebuild the economy. Open the discount window.

Crisis Economics

For the economics people, this two-step solution helps with the liquidity problem (cheaper refinancing), the solvency problem (bankruptcy), and the balance sheet problem (lower rates, more purchasing power) -- the three problems one needs to deal with in the aftermath of a financial crisis. In terms of monetary policy, those who have been carrying out QE have been begging for policymakers to find ways to get ultra-low rates to the front lines as quickly as possible, most notably in housing policy. As Bernanke said at his latest press conference:

One area where monetary policy has been blunted, the effects have been blunted, has been the mortgage market where very tight credit standards have prevented many people from purchasing or refinancing their homes and therefore the low mortgage rates that we've achieved have not been as effective as we had hoped. So, monetary policy maybe is somewhat less powerful in the current context than it has been in the past but nevertheless it is affecting economic growth and job creation.

That's Fed speak for the fact that the administration dropped the ball on the mortgage market (HARP, especially) and has in turn screwed up its ability to do its jobs in helping the economy. But what is good for housing is also good for student loans. Aggressive monetary policy flowing into student loans would have a similar amplification, which makes targets more credible and gets more money being spent, which makes balance-sheet repair easier and has a general virtuous cycle on demand.

Wins all around. So what are the problems?

Mike Konczal is a Fellow at the Roosevelt Institute.

Disgusting pictures that have surfaced from a foreclosure mill's Halloween party reveal a deeper theory of whom debt laws should protect.

If you haven't already, you should read Joe Nocera's column "What the Costumes Reveal." He includes a slideshow of six photos from a Halloween party last year at the foreclosure mill law firm Steven J. Baum, in which the associates were all dressed as homeless people who were just evicted. Part of the office featured a rundown neighborhood destroyed by mass foreclosures and the sign "Baum Estates" hanging above it. Another picture shows a consumer attorney with her eyes cut out. Baum has recently settled on charges that it was manufacturing and robosigning foreclosure documents for $2 million.

It is easy to dismiss this as a particular kind of awfulness, just jerks run amok. Perhaps they are going through some cognitive dissonance from the misery they are inducing. Maybe they are taking on the roles created by a system of aggressive corner cutting. Maybe. But I think there's a more powerful ideology behind their actions that gets at how the 1% and elites view the rules governing troubled debt in this country and how they should function.

Let's look closely at what the signs say. The "Baum Estates" sign hanging over a rundown shantytown shows that the only concern is the ability to collect, without concern for the community. Parts of the procedures necessary for eviction -- “I was never served," "order to show cause" -- are held in contempt. They convey the idea that consumers have no valid excuses when it comes to bad debt. They vilify consumer advocates. They mock the idea that consumers should have any legal recourse during foreclosure, that banks and creditors need to follow basic rules, and that any concerns other than creditors' (rundown neighborhoods, for example) should get consideration.

This notion that those being foreclosed on should be embarrassed about fighting the action and that they, not the banks, are the ones undermining the system has been voiced elsewhere. From last year, Arnold Kling wrote that:

However, the %&*#^ lawyers for the borrower come in and claim standing to challenge the foreclosure on the grounds that the foreclosure notice was sent by someone who has not properly documented that he is the noteholder. Legally, they may have standing to do this. Morally, they do not. The sensible policy would be for the government to step in and legislate that borrowers have no standing to sue unless they are claiming to have complied with the terms of the note.

People calling out banks for not following the rules are immoral, and the government should step in to make sure that the laws governing debts work to protect the maximum return for creditors. And Mark Calabria, director of financial regulation studies at the Cato Institute, writes that: "The current efforts by states to use technical mistakes by lenders to allow borrowers to remain in homes without paying could ultimately undermine the very concept of a mortgage."

"Technical mistakes." Notice the blame in Calabria's comment. Banks, by not following the trust and REMIC laws that constitute the securitization process, aren't the ones undermining the process in which banks can legally bring foreclosures to court, and thus the concept of a mortgage. The states, and ultimately the homeowners, are undermining it by pointing out that the banks haven't followed the rules. This comment is consistent with the idea that the only reason to have laws is to protect creditors from debtors.

This view of the world has its roots in a theory of how the rules governing debt, especially bankruptcy, should function in this country. A heuristic can be used to understand it -- it's called the creditor's bargain. In this idea, the rules should only exist to the extent that they benefit the creditor's ability to collect money. It's simple: if a law, custom, norm, or rule helps creditors collect when things go wrong, it is a good one. If it takes into account concerns other than creditors' return -- say, destroyed neighborhoods, whether banks follow the rules, etc. -- they are worthless.

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This theory imagines, making a perverse mockery of the egalitarianism of Rawls' theory, that all the 1% and all the creditors were put behind a veil of ignorance where they did not know what kind of 1% and creditor they'd be. Maybe they'd have collateral that was sensitive to the business cycle; maybe they'd be slow to notice trouble and thus slow to collect. Given the wide variety of problems that could occur, and the way debtors could play them off each either, the creditor class bargains on rules that benefit them all according to the rank of their claims. And benefitting creditors is the only thing that the rules of debt should consider.

In this world, debtors probably could challenge the legality of their foreclosures, making sure proper procedure was followed. But that's not what the rules are meant to do. The rules are just there to benefit creditors, not debtors. It is in this world that those Halloween costumes make perfect sense. I love pointing out how passionate libertarians like Calabria have been all for the sanctity of contract when it comes to bankruptcy reforms like "cramdown," but when it comes to the idea that all these mortgages are unsecured debt because of bank-led abuses in the chain of property records, they get angry at debtors, even though they are still holders of contracts. But again, if the law is just there to protect creditors against the difficulty of collecting on debtors, not to provide a level playing field for those with debt, it makes perfect sense.

It also makes perfect sense that creditors and bankers haven't gone to jail, but debtors who took out a liar's loan have gone to jail. It makes sense that elites, like former Peterson Institute CEO David Walker, want to see debtors' prisons on the agenda while no elites talk about jail sentences for the abuses in property law. The law is there to coordinate the best interests of creditors, not provide rules and protection for debtors.

(If you thought classical liberalism/libertarianism was all about how contracts, laws, and markets provide level playing fields and protection from abuses of the powerful -- how they take feudal privileges and melt them into air -- and not about how they reconfigure the government, customs, and laws to be protectors of capital and hierarchy, you need to get a copy of The Reactionary Mind, pronto.)

Guess which law professor, almost 25 years ago, provided the defining critique of the intellectual theory that debt laws and bankruptcy should only narrowly consider the interests of creditors, and has worked to provide a counter theory? That's right, Elizabeth Warren. Every time you hear that the banks are afraid of her folksy wisdom and charming accent, also remember that they are afraid of her ability to demolish legal theory that puts the banks and creditors at the center of the law. She noted that the economic value of bankruptcy is only one part, and that our understanding of bankruptcy should have four goals: "(1) to enhance the value of the failing debtor; (2) to distribute value according to multiple normative principles; (3) to internalize the costs of the business failure to the parties dealing with the debtor; and (4) to create reliance on private monitoring."

Warren also noted that bankruptcy was "an attempt to reckon with a debtor's multiple defaults and to distribute the consequences among a number of different actors. Bankruptcy encompasses a number of competing -- and sometimes conflicting -- values in this distribution." For instance, the costs of a foreclosure to a community are a major externality which should be considered. In the same paper she writes, “bankruptcy policy also takes into account the distributional impact of a business failure on parties who are not creditors and who have no formal legal rights to the assets of the business."

Though the Halloween pictures are disgusting, they are a symptom of a larger view of the way the law should work that is even worse -- one in which debtor's protections are mocked, the rule of law is ignored, and shantytowns proudly display their creditor's name over them. This is the way many elites view the rules when it comes to debt. Thankfully, there is more and more mass opposition to this perversion of the law.

Mike Konczal is a Fellow at the Roosevelt Institute.

Garnishing Social Security to pay off student debt ensures that the economic crisis will haunt today's graduates well into their retirement.

Put on your monocle and top hat and pretend you are part of the 1% for a minute. Your first task is to write a set of legal codes about the collection of debt in this country, specifically student debt. And you want to be kind of a jerk about it. What's the one thing you could do for student debt that you don't do for any other type of debt, one that would radically shift the relationship between student loan creditors and debtors both practically and symbolically?

How about this, from the Debt Collection Improvement Act of 1996: "Notwithstanding any other provision of law... all payments due to an individual under... the Social Security Act... shall be subject to offset under this section."

What this means is that when it comes to collecting on student loans, the government can take funds from your Social Security check. There are rules to the offset: the first $750 a month can't be touched, and only 15 percent of benefits above that can be taken to pay back student loans. But this is still a radical break in the social contract with no equivalent for private debts.

If you look at the original text of the Social Security Act, you can see that Social Security payments were not "subject to execution, levy, attachment, garnishment, or other legal process, or to the operation of any bankruptcy or insolvency law." My man Franklin Delano Roosevelt understood that basic economic freedom, one part of which is freedom from utter poverty in old age, would come under assault from creditors and debt and that it was important to clear a space that provides a baseline of income that clever debt collectors can't get to. Social Security is supposed to be just one leg of a three-legged stool for retirement, the amount necessary to keep poverty at bay, and it is crucial that it is protected.

Yet we are willing to snap this leg off the stool as payment for, of all things, loans people take out to educate themselves. In a dynamic economy, education should be risky -- whole occupations and industries come and go with technology, and what was a wise investment at one point is a bad one later on. But there need to be rules for what happens when these risks go bad. We have removed every last rule on this kind of debt.

According to the Project on Student Debt, the average debt load for graduating seniors in 1996, when this law was passed, was $12,750. Now it is over $23,200. Also note that, post-1991 and upheld by the Supreme Court in 2005 as it regards Social Security payments, student loan collection has no statute of limitations. This is one of the very few kinds of debts without such limitations. As this site puts it, "Creditors and debt collectors have a limited time window in which to sue debtors for nonpayment of credit card bills... In most states, the statute of limitations period on debts is between three and 10 years." But in this case, the Department of Education notes, "[b]y virtue of section 484A(a) of the Higher Education Act, statute of limitations of no kind now limits Department’s or the guaranty agency's ability to file suit, enforce judgments, initiate offsets, or other actions, to collect a defaulted student loan."

It is impossible to discharge bad debts in this system under our normal mechanism for handling bad debts -- bankruptcy. When delinquencies happen -- say when you graduate into a recession that elites refuse to fix -- you get thrown into the fee-churning world of private debt collection. This world was memorably described by law professor Ronald Mann as a "sweat box" of fees and other ways of increasing the total debt owed. With fees churning, there's no date after which creditors can no longer go after your student loan payment, and they can even go after the baseline measure society has created to prevent poverty in old age.

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Now with all this in mind, let's quickly examine the New York Fed's recent release of its Quarterly Report on Consumer Credit, specifically this delinquency data:

Student loan delinquencies look to be slowly increasing over time, while credit cards and mortgages go up and down. On the flip side of this dynamic is the amount of loans being "charged off" by private institutions. These are loans that will never be fully replayed, and a cost-benefit analysis tells the lender that it is no longer worth trying to collect the full amount. These are tough estimates to get, but Karen Dynan of the Brookings Institute has one estimate in her "Household Deleveraging and the Economic Recovery":

As credit card and housing debt become unbearable, there's a point at which they get written down. That point is too high, but because of various laws regarding debt collection that shift the strategy and potential end results between the actors, there's a logic to it. As far as I can tell, there's simply no equivalent chart, or even logic, for student loans. Because of legal choices we've made in how to set up this relationship, it stays forever, is virtually impossible to discharge under hardship, churns fees when it goes bad, and creditors can get to anything, including Social Security, to get it repaid. Meanwhile, we have a Great Depression-like event that is throwing college graduates into a labor market that is far too weak.

It is good to see President Obama, as part of his "We Can't Wait" campaign, pushing to get some fencing around the rules for future student loan debtors through an executive order. According to this press release, the government will accelerate the implementation of laws "to limit loan payments to 10 percent of their discretionary income starting in 2012 [instead of 2014]. In addition, the debt would be forgiven after 20 years instead of 25, as current law allows." However, according to an early analysis of this move, "[b]orrowers with loans from 2007 and earlier will not be eligible. Likewise, borrowers who don’t have at least one loan from 2012 or later, like students who graduated in 2011 or earlier, also won’t be eligible. Borrowers who are already in repayment will not be eligible." So the problem remains for now.

How is this not setting a generation up for complete disaster?

Mike Konczal is a Fellow at the Roosevelt Institute.

Could the next step after camping in Zuccotti Park be camping out in homes facing foreclosure?

As people think a bit more critically about what it means to "occupy" contested spaces that blur the public and the private and the boundaries between the 99% and the 1%, and as they also think through what Occupy Wall Street might do next, I would humbly suggest they check out the activism model of Project: No One Leaves. It exists in many places, especially in Massachusetts -- check out this Springfield version of it -- and grows out of activism pioneered by City Life Vida Urbana. It is similar to activism done by the group New Bottom Line and other foreclosure fighters. Here is PBS NewsHour's coverage of the movement.

The major goal of Project: No One Leaves is to mobilize as many resources as possible to protect those going through foreclosure and keep them in their homes as long as possible in order to give them maximum bargaining power against the banks. For those focused on "weapons of the weak," this moment -- with banks and creditors using state power to conduct massive amounts of foreclosures, thus impoverishing poor neighborhoods through a financialized rationality -- is a crucial opportunity for resistance. From the webpage:

Post-Foreclosure Eviction Defense. We mobilize tenants and former homeowners living in recently or about to be foreclosed homes (bank tenants) to stop evictions, protect Springfield’s housing and communities, and mobilize bank tenants to fight back against major lending institutions and banks that are tearing our communities apart.

Their model, a two-step process known as the Sword and the Shield, works:

“The Sword”. Encouraging residents to stay in their homes, and to make their stories public, we organize blockades, vigils and other public actions to exert public pressure on the banks. The sword works together with:

“The Shield”: We inform bank tenants of their rights and work with legal services & progressive lawyers, to use aggressive post-foreclosure eviction defense to get eviction cases dismissed, win large move-out settlements (if it makes sense for that family/person), and force the banks to reconsider foreclosure evictions.

They use public action through blockades, protests, and marches, along with smart legal advice on how to maximize legal resistance to forced removal. Beyond the fact that this is a major space for resistance, it is also a great way to mobilize people. And as JW Mason notes, there is power in having a clear opponent as well as a special type of bargaining power people might not realize they have:

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Homeowners who still have title have a lot to lose and are understandably anxious to meet whatever conditions the lender or servicer sets. But once the foreclosure has happened, the homeowner, paradoxically, is in a stronger negotiating position; if they're going to have to leave anyway, they have nothing to lose by dragging the process out, while for the bank, delay and bad publicity can be costly. So the idea is to help people in this situation organize to put pressure -- both in court and through protest or civil disobedience -- on the banks to agree to let them stay on as tenants more or less permanently, at a market rent.

But there's another important thing about No One Leaves: They're angry. The focus isn't just on the legal rights of people facing foreclosure, or their real chance to stay in their homes if they organize and stick together, it's on fighting the banks. There's a very clear sense that this is not just a problem to be solved, but that the banks are the enemy. I was especially struck by one middle-aged guy who'd lost the home he'd lived in for some 20 years to foreclosure. "At this point, I don't even care if I get to stay," he said. "Look, I know I'm probably going to have to leave eventually. I just want to make this as slow, and expensive, and painful, for Bank of America as I can." Everyone in the room cheered.

Slow, expensive and painful indeed -- it's like putting the banks through their own version of HAMP. Some may reply, "But wait, aren't foreclosures healthy for the economy? Mitt Romney thinks so." But according to the latest research using discontinuities across state lines, "estimates suggest that foreclosures were responsible for 15% to 30% of the decline in residential investment from 2007 to 2009 and 20% to 40% of the decline in auto sales over the same period." This research is being debated, but the opposite evidence -- that quicker foreclosures help the macroeconomy -- can't be found there or anywhere else.

So does this fit well with Occupy Wall Street's agenda? Given the rampant fraud and abuses in the current foreclosure chain, from manufacturing documents to "robo-signing" to fee-stacking to everything else, the Obama administration's refusal to support a serious investigation is a major example of the government-financial alliance and two-tier system of justice that those in Occupy Wall Street hate. Occupy Wall Street likes to pick spaces that are legally contestable -- like private-public parks -- and draw attention to real conflicts between those with power and those without. A residence post-foreclosure is one of those spaces.

This type of demand allows Occupy Wall Street to tap into already existing networks of foreclosure fighters, avoiding the risk of looking powerless by relying on Congress to do anything. And ultimately, it gets at the banks in a way occupations normally don't: Banks may or may not feel that they aren't appreciated enough because of these protests, but they'll definitely be mad if someone is disrupting their foreclosure mills through occupation and refusal to leave.

Mike Konczal is a Fellow at the Roosevelt Institute.